Markets Today: This is not America

‘Under Pressure’ was a particularly apt title to yesterday’s daily from my colleague Rodrigo by way of homage to the late great David Bowie. It is equally appropriate this morning in the context of the WTI oil price that has traded below $30 for the first time since Dec 2003. Nymex and Brent crudes are down a further 2.6% and 1.7% respectively on the night (currently at $30.59 and $31.02) respectively – so back off the lows) and once against oil is proving more troublesome that supportive of global equity sentiment.

What we can say is that concerns about the health of the US economy continue to look overplayed as a source of current global market angst judging from the latest incoming data prints (see below). David Bowie’s 1985 collaboration with Past Metheney therefore gets to sit atop the podium with today’s title.

The Canadian, New Zealand and Australian dollars occupy three of the bottom four places in the G10 scoreboard heading into the New York close, with metals prices also lower across the board – albeit not by much – but a more mixed picture for softs. CAD is down another 0.4%, NZD -0.3% and the AUD -0.2%. The latter still has to test Monday’s 0.6928 low and the cycle low of 0.6896 seen on 7 September in the midst of the August-September China currency and stock market led ructions. More likely than not this will occur in the coming days or at most few weeks, despite the current – for now successful – efforts by the Chinese authorities to stabilise the RMB.

Having successfully squeezed out the last of the short offshore (CNH) RMB positioning yesterday with o/n Hong Kong interbank rates (Hibor) near 70% (and 120% at one point) yesterday’s onshore fix – some 200 points below what was expected is also a strong signal that the authorities are currently prioritising market stability over flexibility. Another fix today close to yesterday’s 6.5628 would further underscore this view, though we need to remember that pent up demand for foreign exchange by Chinese households and corporates is currently being stymied by rapidly imposed restrictions on the extent to which Chinees banks are currently able to accommodate this demand.

The wooden spoon in G10 FX is currently being carried by Sterling, after latest UK industrial production numbers, for November, printing well below expectations (-0.7% vs. 0.0% expected for total production, and -0.4% vs. +0.1% consensus for manufacturing). The Bank of England meets tomorrow – and will publish minutes and voting records immediately thereafter. This will be the first opportunity for a central bank to formally make comment on market developments thus far in 2016. There could also be a further attempt to talk the pound down.

US data last night was not top drawer but still relevant. The NFIB small business optimism survey improved to 95.2 from 94.8 (95.0 expected). We already knew last week that the hiring intentions sub-component was strong. And the JOLTS report shows that job openings rose by 82k to 5,413k in November, close to consensus. One of Janet Yellen’s favourite sub-readings – for the quit rate – rose to 2% from 1.9%, suggesting employees are a little more confident about walking out of one job into another.

As was the case yesterday, US equities are staging a late session rally (aided by the pullback in oil) to just push into the black. But under the weight of the latest fall in oil prices, Treasury yields are making new lows for the year. 10s are down a further 7.6bp to 2.10% – the lowest since 27 October.

Coming Up

With the Chinese authorities having successfully eliminated the ‘basis’ between the onshore and offshore RMB yesterday but done little to reduce expectations that the onshore RMB is headed lower, there will be keen interest today in what the latest China trade data delivers. Based on the December release, we should probably expect the CNY denominated data to be published near 1pm AEST, and the USD numbers an hour or so later.

Lower oil prices in December may have contributed to a further weakening in annual import growth, where the market consensus is for imports to be down 8.0% y/y in dollar terms, from -6.8% in November. Care will therefore need to be taking in judging between volume effects that represent softening demand, and value effects (negative ‘J-curve’ effects could also be apparent, four months on from the August currency moves). On exports, the annual contraction is seen deepening to -11% from -8.7%. Numbers such as this will do nothing to alleviate pressure on the currency, even though they would produce a trade surplus of $51.3bn (from $54.1bn. in November).

Nothing else is due in the APAC time zone. Tonight, we’ll get EU industrial production, the Fed’s Beige Book and speeches from the Fed’s Rosengren (now an FOMC voter) and Evans (a dove who is no longer a voter).

Overnight

On global stock markets, the S&P 500 was +0.10%. Bond markets saw US 10-years -7.74bp to 2.10%. On commodity markets, Brent crude oil -1.97% to $30.93, gold-0.6% to $1,090, iron ore -0.3% to $41.19. AUD is at 0.6981 and the range was 0.694 to 0.7021.

About the Author

Ray Attrill is Head of FX Strategy within the Fixed income, Currencies and Commodities division of National Australia Bank.

In this role, he advises the bank’s dealing rooms and institutional and corporate clients on developments in global foreign exchange markets.

Ray has 30 years experience as an economist and market strategist, obtained in roles working in London, Sydney and New York. Prior to joining NAB in 2012, he held a similar role at BNP Paribas, based in New York.

He previously amassed considerable experience in research and strategy, being a joint founding partner for 4CAST limited, a leading independent economic and financial market research company. Prior to that, he worked for many years in senior roles at MMS International, also a leading on-line market research provider.

He holds both Master and Bachelor of Science degrees in economics from the London School of Economics.